Why Microsoft should buy Hulu (or at least think about it)

This morning is buzzing with reports that Hulu, the network-backed online video service, is on the market. Names such as Yahoo, Google, News Corp., Netflix, Amazon.com and Apple are being floated as potential suitors.

“By signing up the investment banks, however, Hulu is making clear that it is not just on the receiving end of interest,” the L.A. Times reports. “Rather, its owners – News Corp., Walt Disney Co., NBCUniversal parent Comcast Corp. and Providence Equity – are seeking to exit the company three years after it launched.”

So, who could buy Hulu? What about Microsoft?

The more I think about a Microsoft deal, the more it makes sense. Sure, there are some cons, but the pros may outweigh them.

Microsoft once tried to compete with Google’s YouTube with its own online video service, Soapbox. The Redmond-based company killed it in July 2009 after it became obvious YouTube had all the momentum. Hulu isn’t quite a direct YouTube competitor, since it offers TV and movies instead of mainly user-generated content. But Google continues to try to leverage YouTube into more of a Hulu competitor.

Controlling Hulu would give Microsoft a high-profile platform for video advertising. Hulu has the name recognition and the content, and viewers already expect ads. Especially with the new “NUads” platform, which Microsoft showed off this week for Xbox 360, Hulu could represent a golden opportunity for Microsoft’s advertising business. And it could make that 2007 aQuantive acquisition – today mostly considered a $6 billion mistake – worth it.

For the past few weeks, especially, but also for the past year or so, Microsoft has been talking up the Xbox 360 platform as an all-around entertainment hub. For example, earlier this month at the Electronic Entertainment Expo in Los Angeles, the company announced plans to bring television to the Xbox 360 in the United States; like partnerships with SkyTV in the U.K., Canal+ in France and Foxtel in Australia, the U.S. service reportedly will connect to cable and satellite operators such as Comcast or DirecTV.

With Hulu in its arsenal, Microsoft could make its Xbox entertainment vision really come true. Sure, it might piss off those Xbox TV partners, but Microsoft could then do with Hulu what it wants.

But, you might be saying, Microsoft already has Hulu on the Xbox 360. Why would Microsoft want to buy it? Like the Yahoo search deal, wouldn’t an alliance work better for both companies?

Perhaps. But consider this: If Microsoft owned Hulu, it could control TV entertainment across the most popular platforms and devices. Hulu is on Sony’s PlayStation 3 and it is (still) rumored for the Nintendo Wii, the Xbox 360’s two competitors. Hulu is on both Apple’s iPhone and iPad. Hulu is on Google’s Android. I can just imagine Microsoft CEO Steve Ballmer foaming at the mouth over this opportunity.

With control of Hulu, Microsoft could optimize it for the Xbox 360. Microsoft could bake Hulu into Windows – an even more enticing proposition as it prepares Windows 8 as an iPad competitor. And Hulu could become a central piece of Windows Phone.

By the numbers, a Hulu acquisition seems to make more sense than Microsoft’s latest purchase, Skype. The Internet phone company isn’t profitable, losing $7 million on $860 million revenue in 2010, yet Microsoft paid $8.5 billion for the ability to integrate Skype and its 170 million users into numerous products.

Hulu, meanwhile, is poised to generate nearly $500 million in revenue this year – up from $263 million in 2010 – and CEO Jason Kilar has said the company is profitable, the AP reports. Hulu Plus, the paid version of the service (with more archived content and the ability to watch Hulu on devices like the Xbox 360), will have 1 million customers by the end of 2011, Kilar said in February.

In May, according to analysis firm comScore, Hulu was the No. 10 online video provider with 28.5 million unique visitors. However, Hulu was No. 1 in terms of video advertising, serving up more than 1.32 billion ads in May alone, comScore said. The average Hulu viewer watched 47.6 ads last month, far more than on any other online video service.

What’s more, the price tag for Hulu is being speculated between $2 billion and $3 billion. Microsoft has around $50 billion in cash lying around.

Hastings

And the cons? Well, Microsoft would need to start dealing with content providers – such as NBCU (now part of Comcast), ABC (part of Disney), Fox (part of News Corp.) and cable networks such as Viacom – but it would be inheriting Hulu employees who do just that. Microsoft could alienate its cable and satellite partners in the Xbox TV initiative. It could experience a customer blowback – consumers didn’t react too kindly to the Skype takeover. Hulu’s business model isn’t exactly proven or dependable. And it likely would need to continue offering Hulu services to competitors like Sony, Apple and Google – though it would receive that revenue.

The Hollywood Reporter mused that Comcast, which now owns 25 percent of Hulu, could be reluctant to sell to a non-media company. “Hulu is more of a threat to Comcast if in the wrong hands, while Disney and News Corp. content will always be needed,” Janney Montgomery Scott analyst Tony Wible told The Hollywood Reporter. “Anyone that could aim to spur cord cutting or (cord) shaving” could be unwelcome.

For Microsoft, one barrier to a Hulu purchase is that Netflix CEO Reed Hastings sits on the board of directors. Hastings likely would need to bow out. His involvement with Microsoft, perhaps, makes an acquisition of Netflix more likely – though the snail-mail DVD-delivery portion of its business model makes little sense for Redmond.

If Microsoft is in the market for entertainment services, Hulu makes more sense.

Would a Microsoft acquisition of Hulu make sense?

Yes! Microsoft needs to assert its presence in digital entertainment.

Sure, though Microsoft likely could continue building out its current entertainment products.